Are Contributions to a Charitable Trust Tax Deductible?

A charitable trust is a legal arrangement where a donor transfers assets to a trustee to manage for a charity’s benefit, a structure that can offer financial advantages to the donor. A primary motivation is the potential for a tax deduction. The rules governing this deduction are specific, depending on how the trust is structured and the assets contributed.

Qualifying Charitable Trusts for Deductions

To qualify for a tax deduction, a charitable trust is set up as an irrevocable “split-interest” vehicle. This means the benefits are divided between a charity and non-charitable beneficiaries, like the donor’s family, and the action cannot be reversed once assets are transferred. The two main types of split-interest trusts that allow for a deduction are Charitable Remainder Trusts and Charitable Lead Trusts.

A Charitable Remainder Trust (CRT) provides an income stream to a non-charitable beneficiary for a set term, not to exceed 20 years, or for the beneficiary’s lifetime. At the end of this term, the remaining assets are distributed to one or more charities. The contribution to a CRT generates a partial tax deduction for the donor in the year the trust is funded.

There are two primary forms of CRTs. A Charitable Remainder Annuity Trust (CRAT) pays a fixed dollar amount to the income beneficiary each year. A Charitable Remainder Unitrust (CRUT) pays a fixed percentage of the trust’s value, which is recalculated annually, meaning payments can fluctuate with investment performance.

A Charitable Lead Trust (CLT) operates in the reverse, paying the income stream to a charity for a set term. Afterward, the remaining assets are transferred to non-charitable beneficiaries, such as the donor’s heirs. This structure is often used to transfer wealth while minimizing gift and estate taxes.

For a donor to receive an immediate income tax deduction for a CLT contribution, the trust must be a “grantor” trust. This means the donor is treated as the owner for tax purposes and pays taxes on the trust’s income. Non-grantor CLTs do not provide an upfront income tax deduction, but the trust can deduct its payments to the charity.

Determining the Charitable Deduction Amount

The tax deduction from a charitable trust is not the full market value of the contributed assets. Instead, the deduction equals the present value of the benefit the charity is projected to receive, a calculation guided by IRS rules. For a Charitable Remainder Trust, the deduction is the present value of the remainder interest left for the charity. For a grantor Charitable Lead Trust, the deduction is the present value of the income stream the charity will receive, though the remainder interest passing to heirs may be subject to gift tax.

The size of the deduction is influenced by several variables established when the trust is created.

• The fair market value of the contributed asset.
• The trust’s term, which can be a fixed number of years or a person’s lifetime. A longer income term for a non-charitable beneficiary in a CRT reduces the deduction.
• The payout rate to the beneficiary. In a CRT, a higher payout rate to the non-charitable beneficiary lowers the charitable deduction.
• The IRS Section 7520 rate, a monthly interest rate used to determine present value. A higher rate increases the deduction for a CRT but decreases it for a CLT.

Income Tax Deduction Rules and Limitations

After calculating the deduction amount, Internal Revenue Code rules limit how much can be claimed in a single tax year based on the donor’s Adjusted Gross Income (AGI) and the type of property contributed. These AGI limitations set a ceiling on the annual deduction.

For cash contributions made through the end of 2025, the deduction is limited to 60% of the donor’s AGI, reverting to 50% in 2026. For contributions of long-term appreciated property, like stocks or real estate held for over a year, the limit is 30% of AGI.

For example, if a donor with a $300,000 AGI has a calculated deduction of $100,000 from appreciated stock, their current year deduction is capped at $90,000 (30% of $300,000).

If the deduction exceeds the AGI limit, the unused portion is not lost. A donor can carry forward the excess deduction for up to five subsequent tax years. In the example above, the remaining $10,000 could be used in the following year, subject to that year’s AGI limits.

Required Documentation for Claiming the Deduction

Claiming a tax deduction for a contribution to a charitable trust requires specific documentation. For any non-cash property contribution valued at more than $5,000, a qualified appraisal is necessary. The appraisal must be performed by a qualified appraiser no earlier than 60 days before the contribution and received by the donor before filing their tax return.

This information is reported on IRS Form 8283, Noncash Charitable Contributions, which is required for non-cash donations over $500 and must be filed with the income tax return. For contributions over $5,000, Section B of the form must be completed with signatures from the appraiser and a charity official.

The donor must also retain a copy of the legal trust instrument that established the trust. This document outlines the trust’s terms and serves as foundational evidence of the arrangement. The trustee has separate filing responsibilities, including Form 5227, the Split-Interest Trust Information Return, which reports the trust’s financial activities.